Bank of Japan Gov. Kuroda doesn’t expect a U.S. default

While International Monetary Fund Managing Director Christine Lagarde was sounding the alarm over the damage a U.S. debt default could do to the world economy, Bank of Japan Gov. Haruhiko Kuroda remained relatively calm.

Speaking in the stuffy confines of the Council on Foreign Relations’ headquarters just off Park Avenue in New York, Kuroda was asked about the threat of default. He answered that he doesn’t expect the U.S. to do any such thing.

That said, even if a default did occur, it wouldn’t affect how the Bank of Japan treats Treasurys for collateral purposes, he added.

Japan is the second-largest creditor to the U.S., notes Reuters, holding $1.135 trillion of U.S. Treasurys. No. 1, of course, is China at $1.277 trillion.

Financial markets were enjoying some relief on Thursday on reports House Republican leaders were set to offer a proposal that would give the government an extra six weeks or so under the debt limit in order to provide room for more negotiation.

Kuroda’s comments don’t mean Tokyo isn’t looking on at the U.S. spectacle with concern. Both Tokyo and Beijing have made clear that they fear a default could destabilize global financial markets. And that’s a point U.S. Treasury Secretary Lew was making in congressional testimony Thursday morning.

Kuroda, meanwhile, cited the fiscal impasse as one of a number of risks that could slow the global economy and, thus, complicate Japan’s own efforts to stimulate its economy and vanquish a nearly two-decade bout with deflation. The U.S. economy is on track to achieve 3% annualized growth in the near term unless the budget troubles derail it, he said.

At the same time, Europe appears to have bottomed out but is poised to keep growing very slowly. China and emerging economies round out the risks to the global growth outlook, he said, in a largely self-congratulatory speech focused on the impact so far of the Bank of Japan’s aggressive quantitative easing strategy.

Kuroda said “animal spirits” are finally starting to return to the Japanese economy after a long slumber. He hailed the sharp (36.5%) year-to-date rise in the Nikkei index
/quotes/zigman/5986735JP:NIK , a rise in inflation expectations and the BOJ’s ability to keep bond yields relatively under wraps.

Japanese interest rates have been near zero for years. Past QE efforts have failed to do much to fight off deflation. The aggressive approach put in place by Prime Minister Shinzo Abe after taking office late last year — an approach that included appointing Kuroda to the central bank — is aimed at boosting inflation expectations and shaking loose investment and spending. By boosting inflation and inflation expectations while containing bond yields, the BOJ is focused on cutting the real interest rate (the rate minus inflation).

In reply to a question from economist Martin Feldstein, Kuroda acknowledged that keeping down the yield on longer-dated bonds while simultaneously boosting inflation expectations is a tall order, but is achievable as inflation expectations creep up slowly and the BOJ continues to conduct massive purchases of government bonds and other assets.

The yield on Japan’s 10-year bond
/quotes/zigman/15866525BX:TMBMKJP-10Y stands at just 0.651%. The yield has fluctuated as the Japanese stimulus efforts have gathered pace, starting the year around 0.85%, dipping to around 0.46% in April as the BOJ fired up its revamped bond-buying plan, then rising to more than 0.9% by late May.

After the New York stop, Kuroda is on his way to Washington to join Lagarde, Lew and other international officials gathered for the annual meeting of the IMF and World Bank. But Kuroda didn’t sound like he was about to spend too much time pushing policy prescriptions.

While tight coordination of global monetary policies is warranted in the wake of major shocks, current conditions are at least close to “normal,” he said. That’s not a surprising stance from a policy maker who is keen to brush off criticisms of Japan’s own yen-weakening policies as being solely focused on the domestic economy rather than on the exchange rate.

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